No Panic On Dalal Street Yet, But Vote For Brexit Could Trigger Crash

European stock markets rallied sharply on Thursday amid expectations that Britain would vote to stay in the European Union. The BSE Sensex also edged higher, signalling there's no sense of panic about today's Brexit vote on Dalal Street yet. And rightly so! According to most analysts, India is unlikely to be impacted much even if Britain votes to exit the European Union.

But Friday could be a big day for investors, and no matter what analysts say, they should be prepared for huge volatility at the start of trade tomorrow. Remember, Indian stock markets have a tendency to overreact to global events.

In November 2010, the Sensex slumped 615 points in intraday trade, after North Korea fired artillery shells on South Korea. In December 2014, the Sensex and rupee came under pressure because of the economic crisis in Russia and then in August last year, the Sensex witnessed its biggest-ever point loss in response to events in China.

It is therefore important to hedge positions before the Brexit verdict is declared on Friday.

Here are 10 things to know ahead of Brexit verdict:

1) Polling for Brexit will start at 12.30 p.m. today (IST); it will end at 3.30 a.m. on Friday. First results will start coming in at around 6.30 a.m. - 7 a.m. on Friday, while final results are expected between 12.30 p.m. and 1 p.m. tomorrow (IST).

2) The Brexit referendum is too close to call and can go either way, analysts say. However, markets expect Britons to vote in favour of remaining in the European Union.

3) A vote to remain in the EU could lead to near-term relief for financial markets, said analysts from HDFC Bank. The rupee, which hit a low of 67.43/dollar today, could rally towards the 66.80 level against the dollar, they added. However, the improvement in sentiment may be short-lived as focus could shift back towards tighter US monetary policy and economic developments in China, they said.

4) On the other hand, if the United Kingdom votes to leave the EU, Bank of America expects equity markets to crash 10 per cent. Earlier, billionaire investor George Soros had warned that the pound, the bellwether trade for Brexit watchers, could plunge more than 20 per cent should voters back leaving.

5) Globally, a vote in favour of Brexit could lead to a risk-off trade, which means investors will junk equities and other risk assets, in favour of safe assets such as gold and US treasuries.

6) Indian markets will also bear the brunt if global investors turn risk-averse. Foreign investors could start selling aggressively in domestic equities and bond markets, which will impact the Sensex and rupee. HDFC Bank analysts expect the rupee to hit record low.

"We see an upside of 68.50-69.00 in immediate response to 'Brexit' but see it recovering thereafter and moving back to a trading range of 67.00-68.00 in third quarter of 2016," said Abheek Barua, chief economist of HDFC Bank.

7) Domestic equity markets may also witness a kneejerk reaction if Brexit happens, with some analysts expecting the Nifty to dive by 500 points in the coming days.

"If Brexit (happens), downside is 500 points... No Brexit, upside not much. So, if you are short and Brexit doesn't happen, you won't lose much," said fund manager Vivek Pandey.

If Brexit - downside is 500pts
No brexit -upside not much
So if u r short and brexit doesn't happen, u won't lose much..— Vivek Pandey (@IVivekPandey) June 22, 2016

8) Among individual stocks, those exposed to the UK will be most impacted. Tata Motors, whose UK subsidiary Jaguar Land Rover, contributes majorly to its bottom line, may come under huge pressure. Jaguar Land Rover's annual profit could fall by 1 billion pounds ($1.47 billion) by 2020 in case of Brexit. Tata Steel, which gets around 30 per cent sales from UK, may also face pressure.

9) IT stocks with substantial exposure in the UK may also witness selling because the sharp depreciation in pound may lead to translation losses. Pharma and auto-ancillary companies with substantial exposure to the UK and EU are also expected to take a hit.

10) However, long-term investors should not worry, analysts say. That's because Indian markets have a tendency to bounce back sharply, once global sentiments start to turnaround post such events.

"Indian equities - Brexit & Rexit are highly exaggerated events, I am afraid markets will be disappointed if they don't really exit," said market veteran Porinju Veliyath.

Indian Equities - Brext & Rexit are highly exaggerated events, I am afraid markets will be disappointed if they don't really exit :-)— Porinju Veliyath (@porinju) June 23, 2016

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